Working in another country or with an organization from another countries demands knowledge and consideration of their environmental forces in order to create a good strategic plan. To be successful in international business manager must be aware of the culture with which they deal. International operating companies must have a strategic management plan that takes in to consideration the real and potential forces in a foreign environment, as well as the forces at work in the domestic environment. A manager has to understand the new environment, which means understanding the people and their culture. Physical forces and geographic factors determine transportation and production cost. Mountains and deserts are barriers to the movement of people; ideas goods and services can be an advantage if the infrastructure is good. However, it can also be a disadvantage, because real estate and labor are more expensive.
Another important area is legal considerations, both domestic and international. Where a company decides to register its headquarters affects jurisdiction. Knowledge of the laws in both host and home countries, as well as international law, is essential. Specific legal considerations include tax laws and their relative enforcement, liability laws, employee-employer relations, and, most importantly, quotas and other restrictions on imports and exports. In dealing with foreign countries, agreeing on the legal basis for internationals relations and enforcing such laws are equally problematic.
Political forces can have an impact on organizations operating in foreign countries. Political instability should be reason enough for a company to carefully weigh potential gains and losses. Two volatile political forces are nationalism and expropriation. The political environment is a critical variable in the long-term efficiency of a firm. Government involvement is of particular concern in terms of regulation, and firms in regulated industries should pay special attention to environmental trends to predict future courses of action. Strategic management should be based on careful observation and analysis of the political environment.
An organization that plans to establish a branch in a foreign country should examine the labor pool; skills, social status, religion, gender, and age are major factors that can influence the success of a business. Unknown competitive and distributive forces can interfere as well. A strategist must explore the strengths, weaknesses, and competitive forces in a host country as part of the strategic management process. Distribution channels for goods and services must also be considered. A more highly developed country also has a higher concentration of wholesalers and retailers. Finally, measuring the economy in terms of gross national product (GNP), per capita GNP, and income structure can indicate whether a country would provide an appropriate environment.
Examining all of these variables is mandatory for successful strategic management in the international arena. Strategic management in a company that operates exclusively in a domestic environment, where management is familiar with most of the influencing factors and has ready access to reliable information, might be noting more than determining cost, revenue, and profit; the same cannot, however, be said for a company that goes international.
Larger corporations are more likely to affect developing countries, as opposed to smaller corporations with fewer international operations. This is due to several factors:
- Magnetism — This refers to the ability of multinational corporations to integrate and coordinate a global system, which gives them the power to affect the social, political and economic development of the nations with which they do business.
- Diversity — Because these large corporations are geographically diversified in their operations, they are minimally dependent on any location. This increases their bargaining power in dealing with their host countries. Influence in a relationship is the result of the power differential between the two parties. There4fore, the greater the balance of power in favor of a multinational corporation, the more likely that it can affect the environment of its host country.
- Flexibility– This refers to the ability of multinational corporations to adapt to changing environments. They diversify in numerous ways (locations, products, processes etc.), which enables them to respond to any threats or opportunities in their environments.
The Domestic Environment
The domestic environment is composed of internal forces, such as personnel, production, finance, marketing and external (uncontrollable) forces, such as the social cultural, political-legal, business economic and technological forces that operate within a country. These forces are the basis of any organization and are extremely important in the international environment. Social-cultural forces include education, religion, values, tradition, language, population trends and other factors that provide the basis for the social behavior of individuals in a society. Political legal forces include the government, the legal and judicial system, politics and other factors that affect how a society governs itself and the stability of the process. Business-economic forces include GNP, income distribution, structure of the economic sector, taxes, labor marketing and distribution, the financial sector, infrastructure, foreign trade, and management style. Technological forces include computerization, automation, telecommunications, research and development, and other factors that relate to the overall level of technological development in a country.
Changes in the political factors may mean that a government suddenly restricts exports and imports, which would have a definite impact on doing business overseas. Therefore, a through strategic management effort in a multinational company should include research into all domestic laws that regulate international trade or transfers.
The International Environment
The international environment of a multinational enterprise consists of independent multinational organizations, such as the United Nations, the World Bank, the International Monetary Fund, and the International Organization for Standardization, as well as international treaties and exchange rates. The main purpose of these organizations is to facilitate, promote, and provide security for the international exchange of products, services and money. Therefore, these valuable resources should be integrated into the strategic planning process of a multinational operation.
The World Bank consists of the International Bank for Reconstruction and Development, the International Finance Corporation, and the International Development Association. It mainly serves to provide less developed countries with loans and credit. The borrowers spend millions of dollars provided by the World Bank to buy the products they need for a variety of projects. Therefore, an international company should improve its understanding of these new potential markets. Information about the activities of the World Bank can be a valuable asset in identifying potential buyers in (Least developed countries) LDCs. The World Bank also facilitates business relations by addressing the money needs of future business partner in LDCs. In addition, the bank’s center for arbitration works to resolve difficulties encountered by businesses in foreign countries. Awareness of the existence of the center for arbitration can radically change the basis of international strategic management, because it creates an atmosphere of fair play. This is particularly critical when dealing with cultures where business philosophies and missions vary. Foreign partners, whether governments or companies supported by such organizations as the World Bank tend to have better infrastructures, which facilitates business relations in terms of transporting products and communicating.
The World Bank is an example of a multinational organization that facilitates large projects between nations and multinational enterprises. The International Organization for Standardization (ISO) is an example of an organization that facilitates business relations of all sizes by standardizing measurements. Both are representative examples of multinational organizations in the international environment that facilitate relations, supply information, and provide security. International organizations are catalysts of international business and should be integrated into the strategic planning process right from the start. They can offer a variety of reasonable alternatives and provide information to help evaluate those alternatives. Even more important is their impact on implementation and control. The World Bank has a major interest in the success of any project it funds. Therefore, integrating the services of this organization adds the support of one of the most powerful forces in the world.
External Links:
- Managing Differences: The Central Challenge of Global Strategy (Harvard Business Review)
- The global company’s challenge (McKinsey & Company)